Global Mutual Funds - Benefits, Risks & Returns
While Indian investors are encouraged to invest in several kinds of mutual fund schemes on the domestic front, investors may be wary of overseas mutual fund investment. Nonetheless, investors may consider global funds for investing in companies abroad. Like in any mutual fund, in a global mutual fund, capital from investors is pooled to buy different securities spread over various countries, as well as those in the investor’s country of origin (home country). Global funds, due to their international nature, are also termed “world funds”.
With the distinctive quality of boosting portfolio diversification by investment spanning different geographical areas worldwide, global funds reduce risks in investment, helping investors realise potential returns. They have other characteristic features and perks, and if you wish to explore them further, it is worth knowing the basics
What are global funds?
Global funds are a mutual fund category that invests in international companies around the world, as well as in an investor’s country of origin. Given this, global funds invest in a wide variety of securities and sectors overseas and within an investor’s domestic market, making the combination a winning one for portfolio diversification. The kinds of instruments and assets that these funds invest in comprise debt securities, stocks, and ETFs or exchange-traded funds, among other securities.
Different kinds of global funds exist. For example, some may invest in debt securities as a major component, while others may invest mainly in equity. Other funds may invest in a combination of both.
Before moving ahead in your understanding of global mutual funds, it is important to note that the terms global funds and international funds are used interchangeably. While the focus and aims of the funds may be similar, they are not alike. The crucial distinction lies in the fact that global mutual funds invest in securities of international companies, and in securities of companies belonging to the investor’s home country, but international mutual funds only invest in company securities abroad, excluding those of the investor’s home country. From the investor’s viewpoint, global funds are a blend of domestic and international securities, while international funds are purely composed of foreign securities.
Understanding the Structure of Global Mutual Funds
Once you know the answer to the question, “What are global funds?”, it is vital to find out how these funds are structured. Global funds are structured based on key factors, explained below:
Where the Fund Invests
The structure of a global mutual fund is dependent on the place at which the fund invests its fund corpus. For instance, regional funds invest their corpus in particular regions or certain countries. Investors get a choice of regions or countries but must evaluate specific markets before opting to invest. Additionally, investors get options to invest in a variety of company funds in different countries (with a single global mutual fund scheme). These are global mutual funds in the true sense of the word, resulting in broader portfolio diversification compared to regional funds.
How the Fund Invests
When you are seeking investment in a global mutual fund, you may want to enquire how the mutual fund invests its corpus. A global fund can either invest its corpus directly or indirectly. In the direct investment mode, the manager of the mutual fund is a local fund manager, investing the fund and running it.
On the other hand, in the indirect system, the mutual fund house obtains funds from investors and these are transferred to a fund house overseas. Typically, these funds are referred to as “feeder funds”. Another method of indirect investment is called the “fund of funds” where the funds of investors are invested in a group of foreign funds.
Another way that global funds are invested is via a combination of both domestic and foreign assets or securities. The amalgamation of these brings portfolio diversification to the investor’s table. Furthermore, it results in efficient risk mitigation and taxation management.
What the Fund Invests In
Global mutual funds invest in an array of securities that span different sectors and industries from agriculture to technology. Nonetheless, in a more specific context, global funds invest in securities and instruments of particular sectors/industries. For instance, investors can invest in global funds concerning only the energy sector, across countries. This can be a boon for investors who believe a particular sector’s prospects are positive.
Key Features of Global Mutual Funds
Global mutual funds have specific characteristics, adding to their appeal, yet enhancing risk, depending on the fund selected and the investor. Moreover, some of the features translate into benefits. Here are salient features:
Risk/Return: The opportunities for investment and fruitful returns may be plenty when you invest in global mutual funds with a variety of countries and markets. While returns may be potentially high in some highly stable economies, there are risks related to currency fluctuations and market volatility, depending on the fund and the country.
Diversification of Financial Portfolio: Global mutual funds invest in several countries and a range of industries/sectors. Since investors also get the chance to invest in domestic markets, their portfolios remain potentially balanced and achieve diversification to mitigate risk.
Hedge Against Inflation: Due to the extent of portfolio diversification that funds offer, they give investors a strong weapon to combat inflation.
Taxation: Any mutual fund that invests mainly in overseas markets is treated as a non-equity mutual fund where taxation is concerned. In case you sell your mutual fund units within a 3-year timeframe from the date of buying them, whatever profits are made are added to your income, and the total amount is taxed according to your tax bracket. Furthermore, regarding global funds, if you sell fund units after the 3 years, returns are taxed at a rate of 20% with the benefits of indexation.
Benefits of Investing in Global Mutual Funds
Investing in global funds has significant pros, highlighted below:
Introduction to International Markets: Global mutual funds expose investors to international funds and financial markets, introducing them to new companies at the forefront of the world economy. Furthermore, these funds give investors a bird’s eye view of foreign industries and currencies. Finally, as international investment is involved in global mutual funds, investors get a chance to play a role in the development of emerging economies and reap potential profits from developed ones.
Reduction of Risk: Global funds invest in diverse classes of assets over many regions. This diversification spread over various countries and sectors curbs market volatility to a potentially significant extent. Therefore, if downturns are experienced in some markets, others that are up will make up for any losses felt.
Leveraging Different Markets: The potential for optimal returns varies from market to market, and from company to company. For example, the U.S. market is robust and provides stability. Furthermore, emerging markets like India and Brazil may be prone to more volatility but can be potentially profitable. By taking advantage of the potential of a range of markets, global funds let you invest to achieve positive outcomes.
Factors to Consider Before Investing in Global Mutual Funds
If you have decided to explore global mutual funds as an investment channel, there are some points to tick off your consideration list before you take the plunge and invest. Here are some elements to ponder:
Your Aim of Investment: Different funds concentrate on varying variables regarding the aims of the investor. The focus of some funds may be growth in the long run, while others generate steady income. You must invest according to your financial objectives and match the fund with these aims.
Risk: Any global fund comes with elements of risk, and these change from fund to fund. Global funds have risk factors based on their exposure to currencies, markets, and asset classes. While investing, your risk tolerance must be suited to a fund’s risk profile, regarding the degree of risk and the time horizon.
Fund History: Global funds have track records and these can be studied before you invest. This may not assure you of returns but it helps to gauge funds.
Expenses: Mutual funds have certain attached costs. Expense ratios are a form of mutual fund expenses, and these should be kept on the low side to prevent erosion of your potential returns.
Fund Liquidity: It is important to consider the liquidity aspect of the fund. Investors who wish to have liquidity with any fund should be able to withdraw from units in the fund when required. The aspect of liquidity and permissibility to exit funds may change from one AMC to another.
Conclusion
Typically, many investors may be satisfied with their mutual fund schemes within the Indian market domain. However, for real portfolio diversification to occur, and to widen your gateway to investment with exposure to international businesses and markets, global funds may be considered. With a blend of exposure and investment in domestic and international companies, global funds lessen your risk in investment on account of the simple idea that all markets rarely rise or fall simultaneously.
Nonetheless, before investing in a global mutual fund, investors need to conduct proper research into funds, the companies and sectors they invest in, and the time horizon of the fund. Apart from this, investors must evaluate their own financial positions, risk profiles, and time horizons to meet investment objectives.
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FAQ
What are global mutual funds?
Global mutual funds lie under the helm of mutual fund schemes that offer investors the chance to invest their capital in a global mutual fund comprising securities of companies that are present on the world stage, not just domestic, and including companies in the investor’s home country. A global mutual fund has the distinctive aim of providing investors with exposure to international companies and sectors existing across the globe where potentially wealth-creating opportunities await.
What are the benefits of investing in global funds?
Global funds offer investors chances to leverage profit-making through investment in global markets. Investors gain exposure to international markets, achieve a fair degree of portfolio diversification, and potentially realise windows that open to the growth of their capital.
Is there a difference between a global fund and an international fund?
While the words “global” and “international” may be used interchangeably, in the case of mutual funds, global funds, and international funds are two distinct kinds of mutual fund investment instruments. Global funds invest in companies all over the globe, including in the investor’s home nation. International mutual funds only invest in global companies and do not invest in any companies in the investor’s home country. Consequently, global funds that invest in a wider variety of companies potentially offer investors more diversification leverage than international funds. Shape